Asian propylene nears 7-year low on oversupply

OREANDA-NEWS. Asia-Pacific propylene prices have fallen to their lowest level since January 2009 after worsening oversupply sent prices lower around 19pc in the last week.

About 2.5mn t/yr of new propylene capacity has come on line in Asia-Pacific in the second and third quarters this year, adding to existing capacity of 42mn t/yr. But propylene capacity losses — the amount of total capacity that is idled — have fallen from around 15pc in April to just 5pc in August-October amid a lighter turnaround season. And demand has slowed since late August, particularly from China, because of volatility in oil and equity markets and a continuing safety crackdown on petrochemicals plants in eastern Shandong province after two explosions last month.

Deals for Asian propylene were done at \\$550-575/t cfr China and \\$550/t cfr China on 22-23 September, down from \\$620-660/t cfr China late last week. Bids fell further to the low-\\$500s/t cfr China yesterday in anticipation or a rise in availability from the US. These price levels were last seen just after the start of the global financial crisis in November-December 2008, when prices slumped to \\$300-400/t cfr northeast Asia.

Chinese domestic prices have followed suit, tumbling to 4,300-4,400 yuan/t ex-tank in Shandong province, equivalent to \\$570/t on an import parity basis, down from Yn5,400-5,500/t ex-tank a week earlier. Local refineries are undercutting each other's prices as they attempt to offload inventory.

Most sellers and buyers have withdrawn from the trading market after being caught off guard by the sharp price falls. Propylene plants across Asia-Pacific are maintaining stable operations for now, with no sign of any production cuts in response to the market declines. This means prices are not expected to bottom out for the next few weeks at least, as oversupply threatens to intensify. Consumers have mostly built high propylene inventories ahead of China's week-long National Day holidays from 1-7 October, and have little demand for fresh purchases.

Olefins conversion units (OCU), which use ethylene and raffinate 1 to produce propylene, are likely to be the first batch of propylene capacity to be phased out because of unfavorable margins. Ethylene prices have firmed to \\$880/t cfr northeast Asia and raffinate is selling at around about \\$450/t cfr northeast Asia. This puts propylene feedstock costs in a range of \\$550-600/t, which is close to current spot price levels even before taking into account additional variable costs of about \\$100-150/t.

OCU-based propylene capacity in Asia-Pacific totals about 2.3mn t/yr, or about 5pc of total regional propylene capacity. The latest new plant to come on line was South Korean producer YNCC's new 140,000 t/yr OCU unit that started up a month ago. OCU plants are making losses on paper, but producers are mostly integrated with upstream refineries and may not able to shut these units quickly as they need to find outlets for raffinate and meet upstream and downstream supply commitments. Korea-based Hanwha Total cut its OCU rate by 10pc to 80-90pc on 23 September. The firm's OCU produces up to 240,000 t/yr of propylene at full capacity.

Plants where propylene is a major output, rather than a byproduct, have been hard hit by the steep falls in propylene prices, particularly where they are not integrated with downstream production. Merchant methanol-to-olefins (MTO) margins based on olefins prices fell to a negative \\$170/t this week from -\\$130/t last week as methanol prices firmed on pre-holiday restocking. Margins fell into negative territory from mid-August. MTO margins have averaged about \\$20/t so far this year.

Major Chinese MTO producer Ningbo Fund has extended a turnaround at its 600,000 t/yr MTO plant to mid-October from late September. Fellow Chinese producer Zhejiang Xingxing is operating its 690,000 t/yr MTO plant at a reduced rate of about 60pc. It plans to shut down the plant, but has not decided when. And two Shandong-based MTO producers have cut rates by about 10pc this week to 50-70pc.

Average operating rates at Chinese MTO producers this week dropped to the year's lowest level at 42pc, compared with a 2015 average of 77pc. China's MTO-based propylene capacity is about 2.5mn t/yr, or 5pc of the Asia-Pacific market.

Propane dehydrogenation (PDH) producers have been making losses for the last two weeks, but most have kept operating their plants. Cash margins at Asian PDH producers worsened to -\\$90/t this week from -\\$8/t last week. Two Korean PDH producers said they are not able to shut PDH plants quickly as it is difficult to pause their feedstock LPG shipments, which have a 60-day lead time.

Chinese PDH producers are not planning to cut production. The Chinese producers are mostly listed companies and production cuts hurt their company image, one market participant said. Zhejiang Satellite resumed production at its 450,000 t/yr PDH plant late last week after a month-long shutdown for repairs. Shaoxing Sanyuan and Oriental Yangzijiang, which has downstream polypropylene (PP) production, are still making ample profits from the PP sector.

Asia-Pacific's PDH-based propylene capacity is about 3.6mn t/yr, or 8pc of the regional total. Average operating rates at Chinese PDH producers have in fact increased in the last week, rising to over 60pc from 53pc a week earlier.

Refinery-based propylene capacity accounts for one third of the Asian total. Refiners across the region are worried about their high propylene inventories, but none are considering cutting production because of the poor market for byproduct propylene. Gasoline is the major output from fluid catalytic cracking (FCC) units in the region and has always been the priority for FCC operators. The recent strong regional gasoline market has encouraged refiners to continue running their plants at high rates.

The largest portion of Asia's propylene, over 40pc, comes from steam crackers. Crackers that produce a chain of chemicals and are integrated with the major downstream polyolefins industry are less vulnerable to price declines in the secondary propylene market. Cash margins at Asia-Pacific naphtha crackers, based on monomer prices, have fallen steeply to less than \\$100/t this week from a high for this year at over \\$700/t in April, but integrated cracker operators are still enjoying margins of above \\$200/t from polyethylene (PE) this week.

Propylene production losses are likely to fall further to about 4pc in November and December, down from 5-5.5pc in August-October, amid a lighter turnaround schedule for the rest of the year.

Questions are increasingly being raised over how the rising propylene surplus will be absorbed and at what level Asian propylene prices will bottom out, given widespread doubts about the changes of a pick-up in demand from China for the rest of this year.